Late last week, the founders of the Protostarr token announced that they would be immediately halting operations following contact with the enforcement arm of the U.S. Securities and Exchange Commission (SEC). The project will also be returning the 119.5 ETH raised during their ICO (around $40,000 at press time), which launched on August 13th. The move follows the SEC’s August 28 investor warning about ICO-based scams.According to a Forbes interview with Protostarr chief executive Joshua Gilson, the company was contacted by SEC investigators on August 24. While the SEC didn’t accuse Protostarr of any crime during the call, they did pressure Gilson to provide extensive details on the company’s operations, and warned him that he could be prosecuted for providing false answers. As Gilson told Forbes, “I said, I would like to be open with you guys but this is sounding like an ‘I should get a lawyer’ kind of conversation.'”
It’s unclear what prompted the SEC investigation into Protostarr, as there was little publicity surrounding the project and its ICO. Protostarr’s goal was the development of a dedicated payment and tipping channel for video and streaming platforms like YouTube and Twitch, and its ICO fundraising aims appear to have been relatively modest. While there is no question that the SEC has broad authority to investigate ICOs and similar crowdfunding systems, the rules for what constitutes a legitimate ICO remain murky.
Even though they have decided to shutter the project, the team behind Protostarr deny that there was any wrongdoing. Following the call with the investigators, Gilson spoke to a D.C.-based law firm that specializes in cases involving the SEC. To his surprise, the firm couldn’t determine what laws, if any, Protostarr might have broken with their ICO. As a precaution, the firm advised Protostarr to go with the most cautious approach, ending the token sale and returning the funds raised to investors.
“Unfortunately, as a startup, we do not have the necessary resources to both develop our DApp and challenge the SEC’s investigation regarding our ICO and its interpretation under US securities law,” explained the Protostarr team in their press release. Protostarr began returning ETH raised during the ICO to originating wallet addresses over the weekend.